Deck 15: Investment Banking: Public and Private Placement

Question 1

Continued consolidation is not expected in the investment banking industry, as market share and global competition have stabilized.

Answer 1

False

Question 2

In investment banking, the equity market is larger than the debt market.

Answer 2

False

Question 3

The investment banker is someone who buys large new issues of stocks and then sells them to the public after their price has risen.
The investment banker is another type of financial intermediary (see Chapter 14), linking people with funds to those who require them.

Answer 3

False

Question 4

An investment banker acts as a middleman between a corporation needing funds and investors with funds.

Question 5

The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their staffs.

Question 6

Among several other roles, as a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public.

Question 7

Only a small amount of security issues are sold on a "best-efforts" basis.

Question 8

A market-maker transacts in stocks as a broker.
A market-maker can hold its own inventories of shares of stock, and buy and sell them to help ensure a liquid market.

Question 9

In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.

Question 10

The years 2008 and 2009 will likely go down in history as one of the worst environments for companies wishing to go public.

Question 11

The whole area of investment banking is becoming more competitive.

Question 12

The largest underwriter of both stocks and bonds during 2012 was Citigroup.

Question 13

Investment banking has changed from a very competitive price-sensitive environment to one where relationships determine who gets the business.
Competitive forces have increased, and have indeed become international in scope.

Question 14

The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, which dated back to the Depression Era of the 1930s.

Question 15

Large well-established investment bankers often distribute new issues on a best-efforts basis.
A "best efforts" approach is most commonly used by smaller investment banking concerns.

Question 16

The term "underwriter" is synonymous with risk-taker or risk-bearer.

Question 17

Smaller investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.

Question 18

The top 10 underwriters in the world are all large U.S. firms.

Question 19

The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.
Investment bankers continue to play increasingly diverse roles as financial intermediaries.

Question 20

The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking operations and their investment banking operations into two different entities.

Question 21

One purpose of an underwriting syndicate is to distribute securities to the public.

Question 22

The term "underpricing" describes the process of setting the spread between the participants of the investment banking syndicate.
"Underpricing" actually refers to selecting a share price for new issues slightly below the market value perceived by the public.

Question 23

Shelf registration requires the firm to file one comprehensive registration statement, which outlines the company's immediate long-term financing plans.
The process allows an advance comprehensive registration for equity financing within up to a two-year window.

Question 24

Investment bankers can help a firm undertake a secondary offering when the company is too small for a primary offering IPO.
Secondary offerings are about the sale of supplemental shares, as well as those held by owners from the primary offering, rather than the size of the company.

Question 25

An underwriting syndicate is a group of investment bankers who help to distribute a new issue for a company.

Question 26

Between 1990 and 2009, the average first-day return for IPOs in the U.S. was over 30%.

Question 27

Because there is more uncertainty involved in the initial market reaction to common stock, a larger "underwriting spread" often exists for stocks, compared to other types of offerings.

Question 28

When a firm issues new stock, it always results in a dilution of earnings in the long run.
When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

Question 29

The SEC's Rule 415 allows issuing corporations to quickly take advantage of market conditions.

Question 30

The out-of-pocket cost to issue new common stock is always paid by the investment banker.
These costs are ultimately borne by the issuer.

Question 31

The issuing company desires to have as little underpricing of new securities as possible.
Underpriced securities will sell rapidly, but are likely to "leave money on the table" that the issuing firm now cannot realize.

Question 32

An underpriced offering represents a permanent lost opportunity to the issuing firm.

Question 33

The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
The underwriting spread represents the profit that participants in the underwriting process hope to gain from their successful efforts in distribution.

Question 34

IPOs generally underperform compared to the general market in the immediate aftermarket.

Question 35

It would not be unusual for an investment banking syndicate to include as many as 30 investment banking houses in large offerings.

Question 36

Shelf registration has nearly eliminated competition in the investment banking industry.
Shelf registration does not directly impact competition. It is used as a comprehensive vehicle for issues in advance for up to two years.

Question 37

The investment banking industry has shifted its activities to underwriting new securities, rather than advising on mergers and acquisitions.

Question 38

While manipulation of security prices is normally illegal, the SEC allows underwriters to temporarily support the price of stocks that they have brought to market.

Question 39

Only the stronger investment bankers are in a position to benefit from the shelf registration process.

Question 40

"Best efforts" and "direct" methods account for a relatively small portion of investment banking roles.

Question 41

One of the reasons why the debt market is much larger than the equity market is because debt issuances mature periodically, unlike equity issuances.

Question 42

If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
The percentage spread must be calculated between the retail price and the price paid to the issuer, rather than within the syndicate.

Question 43

A major trend of privatization in foreign markets began in the 1990s.

Question 44

The primary rationale for repealing the Glass-Steagall Act was that the U.S. Congress recognized the necessity for increased growth in the investment banking industry within the U.S.
Congress believed that the risks inherent in security lines of business could place the banking system at risk of default.

Question 45

Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.

Question 46

Investment banking is highly concentrated with the top 10 underwriters controlling 90% of the global market for stocks and bonds.
The percentage is over half, but does not approach 90%.

Question 47

Private placement eliminates the expensive and lengthy registration process with the Securities and Exchange Commission.

Question 48

The "best efforts" method of underwriting is the most common method used in issuances.
This method of underwriting is far less common.

Question 49

Shelf registration is most frequently used with new issues of common stock.

Question 50

Because of their lower levels of risk to the underwriter, debt issuances have lower spread percentages than equity percentages, and smaller issuances have lower spread percentages than large issuances.
The smaller the issue, the higher the fees as a percentage of offering price; hence, the greater the spread.

Question 51

Investment banks are hesitant to issue bonds when they perceive the interest rate to be low.

Question 52

Privately placed bonds are the most popular method of raising long-term corporate debt.
Private placements exceed 50% of long-term corporate debt.

Question 53

When a company first goes public, a registration statement must be filed with the New York Stock Exchange.
The registration must be filed with the SEC.

Question 54

Leveraged buy-outs usually entail the use of a large proportion of debt to take control of the firm.

Question 55

Shelf registration has contributed to the concentrated nature of the investment banking industry.

Question 56

A branch of investment banking that has been very opportunistic in recent years has been the increase in sales of foreign securities of companies formerly owned by the government.

Question 57

Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering.
The interest rate is usually higher, and the related costs are lower.

Question 58

Stock prices for Amazon and eBay managed to avoid the turbulent price movements that followed the collapse of the Internet bubble.
Both equities took enormous hits and saw sharp price adjustments downward, but unlike many others they managed to recover strongly.

Question 59

Shelf registration primarily gives large, strong companies flexibility in the timing of debt or equity issues.

Question 60

Google's IPO was controversial because Google used a Dutch investment banking firm to underwrite the IPO.
Google's use of the Dutch auction process deals with the manner in which a selling range is established, marketed, and executed… NOT with the nationality of the firms involved. Any controversy was because of the issue price falling short of the anticipated initial selling range.

Question 61

Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22 to the public. Maxwell will receive $19 per share. The firm has one million shares outstanding and earnings of $6 million before recording the new issue. What is the amount of dilution in earnings per share?

A)$2.79
B)$1.38
C)$1.77
D)No dilution occurs since new money is received by Maxwell.

Question 62

The Glass-Steagall Act prohibited

A)retail brokerage firms from having investment banking operations.
B)commercial banks from combining investment banking and commercial banking functions.
C)investment banks from selling both debt and equity securities.
D)insurance companies from selling investment products.

Question 63

In issuing stock, the term "spread" refers to

A)the profit the managing investment banker gets for an issue of stock.
B)the disparity between the initial asking price and the average price for the stock issued some months later.
C)the difference between what the corporation gets for new issues of stock and what the public pays for the stock.
D)the total cost to the corporation for issuing new stock.

Question 64

Dilution of earnings occurs because

A)a new issue of common stock creates more shares outstanding, which often reduces earnings per share temporarily.
B)the company suffers a decline in earnings after taxes.
C)the investment banker collects an underwriting fee.
D)All of these options

Question 65

Which of the following activities is not a service provided by investment bankers?

A)Underwriting initial public offerings
B)Raising capital via mutual fund offerings
C)Advising in mergers
D)Advising on restructurings

Question 66

Which investment bank underwrote the most common stock and bonds in 2012?

A)Merrill Lynch
B)J.P.Morgan
C)Deutsche Bank
D)Citigroup

Question 67

When a firm sells a new issue through an investment banker, the costs incurred

A)are the "give up" expense of the spread, plus the legal and accounting fees, printing expense, and other small fees.
B)are the spread to the underwriter, which includes all the costs of legal and accounting fees, printing expense, and other small fees.
C)are dependent upon the number of underwriters in the syndicate.
D)are the "give up" expense of the spread, plus the legal and accounting fees, printing expense, and other small fees, and are dependent upon the number of underwriters in the syndicate.

Question 68

Underpricing occurs

A)when additional shares are to be issued for companies with securities already publicly traded.
B)to aid in the market's reception of the securities.
C)in large secondary offerings.
D)All of these options.

Question 69

The risk function of investment banking is categorized mainly under

A)underwriting function.
B)market-maker function.
C)advisor function.
D)agent function.

Question 70

The investment banker's function involves all of the following except which one?

A)Taking a portion of the risk in the distribution of an issue
B)Always ensuring a company that a given amount of equity can be sold so that long-range financial planning can be made accurately
C)Making a market by buying and selling a security to ensure a liquid market
D)Contracting to buy securities from the corporation and resell them to other security dealers and the public

Question 71

Raybac is about to go public. Its present stockholders own 500,000 shares. The new public issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5% spread. The out-of-pocket costs in addition to the spread will be $450,000. What are the net proceeds to the firm?

A)$18,750,000
B)$17,200,000
C)$18,250,000
D)$16,175,000

Question 72

The managing investment banker is typically responsible for

A)putting a syndicate together to aid in the distribution and share the underwriting risk.
B)determining the value (price) of the company.
C)stabilizing the offering during the distribution period.
D)All of these options are the responsibility of the investment banker.

Question 73

Generally, the total cost to issue securities (as a percent of total proceeds)

A)is greater for common stock than for debt and increases as the size of the issue increases.
B)is greater for debt than for common stock and decreases as the size of the issue increases.
C)is greater for debt than for common stock and increases as the size of the issue increases.
D)is greater for common stock than for debt and decreases as the size of the issue increases.

Question 74

An investment banker most commonly makes money from

A)commissions from buyers.
B)fees from other investment bankers in the syndicate.
C)the spread between the issue price and proceeds to the issuer.
D)artificially supporting the stock price during and after the offering.

Question 75

When an investment banker acts in the function of an "underwriter," she

A)gives a "firm commitment" to purchase the securities from the corporation at a set price.
B)guarantees that the company will not suffer a decline in earnings after taxes.
C)may sell as many securities as possible and return the rest unsold.
D)may give advice to management.

Question 76

The investment banker may advise clients on a continuing basis about

A)the types of securities being sold.
B)the number of shares for distribution.
C)the timing of the sale.
D)All of these options

Question 77

Investment banking is changing dramatically into an industry where

A)investment bankers are using larger syndicates to distribute initial public offerings.
B)investment bankers are becoming increasingly larger so that they can take on more risk and have less need for large syndicates.
C)investment bankers don't need a distribution network because most new issues are sold directly to institutional investors.
D)new investment banking firms are being established to deal with the increasing number of companies looking for capital.

Question 78

In a public distribution, the dealer group will generally pay a

A)higher price for the stock than the public.
B)lower price for the stock than the managing investment banker.
C)higher price for the stock than the managing investment banker.
D)lower price for the stock than members of the investment banking syndicate group.

Question 79

Which of the following is not a key role of an investment banker?

A)Market-maker
B)Underwriter
C)Acting as a transfer agent
D)Agent in private placement

Question 80

Market stabilization

A)is the action by the managing investment banker to keep the price of newly issued securities from falling below the issue price to the public.
B)usually lasts 2 to 3 days, but can last up to 30 days if a security is difficult to distribute.
C)cannot always maintain high initial prices-a case in point being the Facebook issue, sold in May of 2012.
D)All of these options